Guest Post: More Credit Rater Accountability?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Reuters reports that pension fund urges more credit rater accountability:

Credit rating agencies should not be exempt from liability in their forward looking statements, the Colorado Public Employees’ Retirement pension fund said on Monday.

At a hearing on Tuesday, Congress will examine whether rating agencies like Moody’s Corp and McGraw-Hill Cos Inc’s Standard & Poor’s need to be regulated further after they assigned top ratings to complex securities that later deteriorated in value.

The Colorado pension fund, which holds more than $29 billion in assets, urged Congress to pass legislation to make the rating agencies more accountable.

Congress must remove rating agencies’ exemption from liability for forward looking statements and as experts under federal securities laws, said Gregory Smith, the pension fund’s general counsel, in remarks to be delivered to the House Financial Services subcommittee on capital markets.

The U.S. Securities and Exchange Commission and Congress are grappling with how to better regulate the rating agencies, which have been criticized for not doing enough due diligence when assigning ratings to securities linked to the housing market.

Late last year, the SEC adopted rules to crack down on conflicts of interests at rating agencies that are paid by the issuers and banks whose products they rate.

The SEC, which gained oversight of rating agencies through a 2006 law, also adopted rules requiring rating agencies to publicly disclose a random sample of 10 percent of their past ratings.

But new SEC Chairman Mary Schapiro, who took the helm at the end of January, has said the status quo is not good enough.

Senator Jack Reed is expected to soon introduce legislation that would allow investors to sue credit rating agencies if they failed to “conduct a reasonable investigation” of a rated security. Reed, a Democrat, is the chairman of the Senate Banking subcommittee on securities.

Credit rating agency Realpoint said banks and issuers should simultaneously provide information to its solicited rating agency and all other federally designated rating firms.

Rating agencies should have the same information that the issuer or bank provides to its hired rating agencies regardless of whether or not they are paid by the issuer that issues the security, Realpoint President and Chief Executive Robert Dobilas said in prepared remarks to be delivered at Tuesday’s hearing.

Testimony from Realpoint, Colorado Pension Plan and others was posted on the House Financial Services website on Monday.

The 2006 law was passed to kick start competition in an industry dominated by three rating agencies, Moody’s S&P and Fimalac SA’s Fitch Ratings. Eleven rating agencies are federally recognized but the Big Three agencies continue to dominate.

It’s about time some pension fund urges Congress to pass laws that make credit rating agencies more accountable, but these same pension funds shouldn’t pass the buck so fast. Just because Moody’s, Fitch or S&P slaps a “AAA” credit rating, it doesn’t mean you can’t question it and think hard before you invest in the product.

Holding credit rating agencies accountable to their ratings is fine, but we also need to hold pension fund managers accountable for their stupid decisions to invest in some of this crap.

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  1. Sasquatch

    When will regulators wake up to understand that the only way to break up the ‘ol boys club is to trash the requirement for the “NRSRO” designation. There is no need for this artificial barrier to entry–markets will quickly decide who is competent and can add value. No such designation exists for entities that evaluate stocks or other financial instruments, and users of specific forms of insight/advice do just fine. What makes NRSROs so special? Their size? Reputation? Gimme a break. Trash the designation and allow real competition. Times up.

  2. Brian

    Yves, more is not better when it comes to postings. If you don’t have the time, don’t subcontract the postings. Every time I see Leo’s name on a post, I skip down. I am just as capable of copying pasting news articles.

  3. Leo Kolivakis


    If I did not post that article your wouldn’t have ever seen it. :)



  4. Independent Accountant

    I have been saying things like you for years. Having seen the SEC’s failure to regulate the CPA business, I have no confidence in any “reforms” it may make of the rating agencies.

  5. Methinks

    Sasquatch is right. Regulation effectively eliminates the competition and no regulator can improve on the discipline imposed by competitive markets.

  6. NicktheLame

    One of the best photos I’ve seen: CRAP Credit Raters Accountability Profession. The darn scissors cuts the Credit Raters from the Accountability Professions.

  7. Greg Hall

    The entire rating profession needs more accountability, and more errors and ommissions liability. Recall Enron and Arthur Andersen? The ratings agencies are not just culpable, but accessories. Also, the entire appraisal and credit scoring professions need revamp and more local micro intelligence needs to be factored in from the bottom-up. This was a systemic failure by the professions themselves. A bunch of out of touch Einsteins…

  8. Brick

    It is unfair to lump all ratings agencies together as some like Egan Jones did have a pretty accurate rating on those risky securities. Those issuing the securities were allowed to pick and chose which ratings agency to use and since they were paying they normally chose the rating agency which rated highest and made them the most money.
    I would be in favour of removing that selection with securities being rated by a random selection of agencies with a high and low rating assigned to each security. I also think the amount of business an individual agency gets through random selection should reflect their accuracy over the preceeding year relative to other agencies.

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